Small captives may go on the block as a result of Covid-19 pandemic

There are about 1,400 captives in India and about 1,700 in the Philippines and broader Asia-Pacific region. About 40% of all captives have under 500 employees, data from IT consultancy and research firm ISG showed.

Bengaluru: Several captive centres of global companies may be put up for sale or shut down, experts said, as their parent entities look to cut costs and focus on business survival following the Covid-19 pandemic.

There are about 1,400 captives in India and about 1,700 in the Philippines and broader Asia-Pacific region.

About 40% of all captives have under 500 employees, data from IT consultancy and research firm ISG showed.

“These centres have not been as resilient. We are seeing backlogs developing at a number of our clients, for example in mortgage processing,” said Stanton Jones, Director and Principal Analyst at ISG. “We expect monetization of these centres to improve operations and add cash infusions to the clients”.

Issues with data processing norms, imposed by regulators, could also result in work moving back onshore, but the repatriation of work would likely be for the short term, he added.

India, in particular, has seen strong growth in captives, also known as global in-house centres.

In 2019, over 75 global companies such as Manhattan Associates and Experian set up new centres or expanded their offices in India as they tapped local talent with skills in newer areas such as digital and analytics.

The sector has been recruiting even as traditional IT services companies have slowed the pace of hiring less over the past few years. In a 2019 report, staffing firm Teamlease said the sector could hire 150,000 employees over the next two years.

HfS Research analyst Ollie O’Donoghue also said he expected potential sale of captives and repatriation of work onshore in response to the pandemic. Smaller captives did not have the ability to shift work to other geographies and struggled to move swiftly to a work-from-home model.

“Smaller captives are also sometimes those that have just started and are still scaling. The processes for dealing with issues like this had probably never been tested,” a consultant who works with captives told ET. “The situation is hard for them because their parents need to implement cost cuts and it is hard to make the justification that you should be spared when your productivity is lagging”.

The concern, however, is that companies may find it hard to find buyers for their captive units. After the 2008 financial crisis, IT companies stocked up on captives.

“IT companies may consider it if the client is key or the work is important. But if the business is sub-scale and the parent has a cost-cutting mandate, it is hard to justify a buyout in these times. During the financial crisis, the captive buyouts were the large ones. For small, under-performing captives, you could just transition the work,” a senior IT industry executive said.